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**Acc122 Exam1 Review Answers** Ch12, Long-term liabilities 1\) On December 1, 2025, Bevis Services signed a 5% notes payable for \$28,000. It is payable over a 5-year term in \$5,600 principal installments on December 1 of each year, beginning December 1, 2026. Which of the following entries needs to be recorded on December 1, 2025? A) --------------- -------- -------- Notes Payable 28,000 Cash 28,000 --------------- -------- -------- B) --------------- ------- ------- Notes Payable 5,600 Cash 5,600 --------------- ------- ------- C) --------------- ------- ------- Cash 5,600 Notes Payable 5,600 --------------- ------- ------- D) --------------- -------- -------- Cash 28,000 Notes Payable 28,000 --------------- -------- -------- Answer: D 2\) On December 31, 2025, Samuels Bakery Company purchased \$650,000 of property by paying \$100,000 in cash and signing a 10-year mortgage at 10% for the balance. The amortization schedule shows that the company will pay \$89,510 per year. What is the journal entry for the first yearly payment on December 31, 2026? A) ------------------- -------- -------- Mortgages Payable 34,510 Interest Expense 55,000 Cash 89,510 ------------------- -------- -------- B) ------------------- -------- --------- Mortgages Payable 55,000 Interest Expense 89,510 Cash 144,510 ------------------- -------- --------- C) ------------------- -------- --------- Mortgages Payable 55,000 Interest Expense 55,000 Cash 110,000 ------------------- -------- --------- D) ------------------- --------- -------- Mortgages Payable 144,510 Interest Expense 55,000 Cash 89,510 ------------------- --------- -------- Answer: A Explanation: Interest Expense = Principal × Interest Interest Expense = \$550,000 × 0.10 Interest Expense = \$55,000 3\) Which of the following statements is *true* of a bond that is issued at a discount? A\) The bond will be issued at par. B\) The stated interest rate is higher than the prevailing market interest rate. C\) At maturity, the bond will repay an amount that is less than the face value. D\) The bond will be issued for an amount less than the face value. Answer: D 4\) If bonds with a face value of \$206,000 are issued at 109, the amount of cash proceeds is \_\_\_\_\_\_\_\_. A\) \$224,431 B\) \$206,000 C\) \$188,991 D\) \$224,540 Answer: D Explanation: Cash proceeds = \$206,000 × 1.09 = \$224,540 5\) The amount of cash interest the borrower pays each year is based on the \_\_\_\_\_\_\_\_. A\) market conditions on the day of payment B\) market interest rate C\) stated interest rate D\) effective interest rate Answer: C Diff: 1 6\) On January 1, 2026, Paxton Planning Services issued \$52,000 of 2% bonds that mature in five years. They were issued at face value. The bonds pay annual interest payments on December 31 of each year. What is the journal entry for the interest payment made on December 31, 2026? A) ------------------ ----- ----- Interest Expense 520 Cash 520 ------------------ ----- ----- B) ------------------ ------- ------- Interest Expense 1,040 Cash 1,040 ------------------ ------- ------- C) ------------------ ----- ----- Cash 520 Interest Expense 520 ------------------ ----- ----- D) ------------------ ------- ------- Cash 1,040 Interest Expense 1,040 ------------------ ------- ------- Answer: B 1040=52,000\*2%\*1 7\) The balance in the Bonds Payable account is a credit of \$67,000. The balance in the Discount on Bonds Payable account is a debit of \$2,750. What is the bond\'s carrying amount? A\) \$2,750 B\) \$69,750 C\) \$67,000 D\) \$64,250 Answer: D Explanation: --------------------------------- --------------------- Bonds Payable \$67,000 Less: Discount on Bonds Payable [2,750] Bond Carrying Amount \$64,250 --------------------------------- --------------------- 8\) On January 1, 2026, Finney Services issued \$200,000 of 10% bonds that mature in ten years. They were issued at 92. The bonds pay semiannual interest payments on June 30 and December 31 of each year. The journal entry to issue bonds would be: A) --------------- --------- --------- Cash 200,000 Bonds Payable 200,000 --------------- --------- --------- B) --------------- --------- --------- Bonds Payable 200,000 Cash 200,000 --------------- --------- --------- C) --------------------------- --------- --------- Bonds Payable 200,000 Discount on Bonds Payable 16,000 Cash 184,000 --------------------------- --------- --------- D) --------------------------- --------- --------- Cash 184,000 Discount on Bonds Payable 16,000 Bonds Payable 200,000 --------------------------- --------- --------- Answer: D 9\) Triston Company has issued a \$30,000 face value, 6%, 5-year bond at 107. What will be the journal entry for the retirement of the bond, assuming the last semiannual interest payment was already recorded? A) -------------- -------- -------- Bond Payable 32,100 Cash 32,100 -------------- -------- -------- B) --------------- -------- -------- Cash 32,100 Bonds Payable 32,100 --------------- -------- -------- C) --------------- -------- -------- Bonds Payable 30,000 Cash 30,000 --------------- -------- -------- D) --------------- -------- -------- Cash 30,000 Bonds Payable 30,000 --------------- -------- -------- Answer: C 10\) On March 21, 2026, the bond accounts of Nolen Services showed the following balances: -------------------------- ------------------------- Bonds Payable \$69,000 credit balance Premium on Bonds Payable 3,300 credit balance -------------------------- ------------------------- The bonds were retired early for \$67,300. What is the journal entry to record the retirement of the bonds? A) ------------------------------------- -------- -------- Bonds Payable 69,000 Premium on Bonds Payable 3,300 Gain on Retirement of Bonds Payable 5,000 Cash 67,300 ------------------------------------- -------- -------- B) ------------------------------------- -------- -------- Bonds Payable 69,000 Loss on Retirement of Bonds Payable 1,600 Premium on Bonds Payable 3,300 Cash 67,300 ------------------------------------- -------- -------- C) ------------------------------------- -------- -------- Cash 67,300 Premium on Bonds Payable 3,300 Gain on Retirement of Bonds Payable 1,600 Bonds Payable 69,000 ------------------------------------- -------- -------- D) ------------------------------------- -------- -------- Cash 67,300 Loss on Retirement of Bonds Payable 3,300 Premium on Bonds Payable 1,600 Bonds Payable 69,000 ------------------------------------- -------- -------- Answer: A Ch14, Statement of Cash Flows 11\) The Statement of Cash Flows reports on \_\_\_\_\_\_\_\_. A\) where cash came from and how cash was spent B\) the company\'s financial position C\) the changes in retained earnings D\) the company\'s profits Answer: A 12\) Which of the following sections of the Statement of Cash Flows include activities that increase and decrease long-term assets (e.g., property, plant and equipment)? A\) the financing activities section B\) the operating activities section C\) the investing activities section D\) the non-cash investing and financing section Answer: C 13\) Outdoor Lighting Supply expects the following for 2025: -------------------------------------------------------- Net cash provided by operating activities of \$280,000 Net cash provided by financing activities of \$66,000 Net cash provided by investing activities of \$76,000 Cash dividends paid to stockholders of \$24,000 -------------------------------------------------------- Outdoor expects to spend \$151,000 on equipment to modernize its showroom. How much free cash flow does Outdoor expect for 2025? A\) \$129,000 B\) \$266,000 C\) \$105,000 D\) \$114,000 Answer: C Explanation: Free cash flow = Net cash provided by operating activities - Cash payments planned for investments in long-term assets - Cash dividends Free cash flow = \$280,000 - \$151,000 - \$24,000 Free cash flow = \$105,000 14\. Vandy Corporation\'s balance sheet and income statement appear below: +---------+---------+---------+---------+---------+---------+---------+ | Compara | | | | | | | | tive | | | | | | | | Balance | | | | | | | | Sheet | | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | | Ending | Beginni | | | | | | | Balance | ng | | | | | | | | Balance | | | | | +---------+---------+---------+---------+---------+---------+---------+ | Assets: | | | | | | | | | | | | | | | | *Curren | | | | | | | | t | | | | | | | | assets* | | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | Cash | \$ | 31 | | \$ | 29 | | | and | | | | | | | | cash | | | | | | | | equival | | | | | | | | ents | | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | Account | | 61 | | | 73 | | | s | | | | | | | | receiva | | | | | | | | ble | | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | Invento | | 59 | | | 61 | | | ry | | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | *Long-t | | 684 | | | 550 | | | erm | | | | | | | | assets* | | | | | | | | | | | | | | | | Propert | | | | | | | | y, | | | | | | | | plant, | | | | | | | | and | | | | | | | | equipme | | | | | | | | nt | | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | Less | | 349 | | | 319 | | | accumul | | | | | | | | ated | | | | | | | | depreci | | | | | | | | ation | | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | *Total | \$ | 486 | | \$ | 394 | | | assets* | | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | Liabili | | | | | | | | ties | | | | | | | | and | | | | | | | | stockho | | | | | | | | lders\' | | | | | | | | equity: | | | | | | | | | | | | | | | | *Curren | | | | | | | | t | | | | | | | | liabili | | | | | | | | ties:* | | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | Account | \$ | 53 | | \$ | 54 | | | s | | | | | | | | payable | | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | Accrued | | 72 | | | 69 | | | liabili | | | | | | | | ties | | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | *Long-t | | | | | | | | erm | | | | | | | | Liabili | | | | | | | | ty*: | | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | Bonds | | 203 | | | 190 | | | payable | | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | *Owners | | 61 | | | 60 | | | ' | | | | | | | | equity* | | | | | | | | | | | | | | | | Common | | | | | | | | stock | | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | Retaine | | 97 | | | 21 | | | d | | | | | | | | earning | | | | | | | | s | | | | | | | +---------+---------+---------+---------+---------+---------+---------+ | *Total | \$ | 486 | | \$ | 394 | | | liabili | | | | | | | | ties | | | | | | | | and | | | | | | | | stockho | | | | | | | | lders\' | | | | | | | | equity* | | | | | | | +---------+---------+---------+---------+---------+---------+---------+ ------------------------------------------------ ------- Income Statement Sales \$807 Cost of goods sold (including dep exp of \$42) 492 Gross margin 315 Selling and administrative expense 182 Net operating income 133 Gain on sale of equipment 16 Income before taxes 149 Income taxes 45 Net income \$104 ------------------------------------------------ ------- The company sold equipment for cash of \$18, & the gain on sale of equipment is \$16. The company also purchased new equipment for \$148. It issued new bonds payable for \$13 of cash and did not retire any bonds payable. It issued new common stocks for \$1 of cash and did not repurchase any of its own common stock. It paid a cash dividend during the year, you need to compute the dividend amount **Required:** Prepare a statement of cash flows for the year using the indirect method. ---------------------------------------------------- ------- ------- Net income \$104 Adjustments to convert net income to a cash basis: Depreciation \$42 Decrease in accounts receivable (\$61 - \$73) 12 Decrease in inventory (\$59 -- \$61) 2 Decrease in accounts payable (\$53 -- \$54) (1) Increase in accrued liabilities (\$72 -- \$69) 3 Gain on sale of equipment (16) Net cash provided by operating activities 146 Investing activities: Sale of property, plant, and equipment 18 Purchase of property, plant, and equipment (148) Net cash used in investing activities (130) Financing activities: Increase in bonds payable (\$203 -- \$190) 13 Issuance of common stock (\$61 -- \$60) 1 Pay a dividend (28) Net cash used in) financing activities (14) Net decrease in cash and cash equivalents 2 Beginning cash and cash equivalents 29 Ending cash and cash equivalents \$31 ---------------------------------------------------- ------- ------- Ch15 Financial statements analysis 15\) The following is a summary of information presented on the financial statements of a company on December 31, 2026. ----------------------- ---------- ---------- **Account** **2026** **2025** Current Assets \$86,000 \$75,000 Accounts Receivable 90,000 69,000 Merchandise Inventory 62,000 58,000 Current Liabilities 57,000 48,000 Long-term Liabilities 42,000 54,000 Common Stock 74,000 54,000 Retained Earnings 65,000 46,000 ----------------------- ---------- ---------- With respect to long-term liabilities, a horizontal analysis reveals \_\_\_\_\_\_\_\_. A\) long-term liabilities decreased by \$20,000 B\) long-term liabilities decreased by 37.04% C\) long-term liabilities decreased by 22.22% D\) long-term liabilities decreased by \$9,000 Answer: C (42000-54000)/54000=22.22% 16\) When performing vertical analysis of a Balance Sheet, the base amount is \_\_\_\_\_\_\_\_. A\) total assets B\) total cash and cash equivalents C\) net income D\) gross profit Answer: A 17\) The vertical analysis of the Income Statement of Bates, Inc. is as shown below: Bates, Inc. Income Statement Year Ended December 31, 2026 and 2025 ----------------------------------- ----------------------- --------------------- (In millions) 2026 Percent of Total Net Sales \$6,355 100.0% Cost of Goods Sold [3,370] [53.0] Gross Profit \$2,985 47.0 Operating Expenses: Selling Expenses 675 10.6 Administrative Expenses [6.5] Total Operating Expenses \$[1,085] [17.1] Operating Income \$1,900 29.9 Other Income and (Expenses): Interest Expense [(400)] [(6.3)] Total Other Income and (Expenses) \$[(400)] [(6.3)] Income Before Income Taxes \$1,500 23.6 Income Tax Expense [3.6] Net Income \$1,270 20.0% ----------------------------------- ----------------------- --------------------- The figure 47.0% shown for Gross Profit in 2026 signifies that the Gross Profit is \_\_\_\_\_\_\_\_. A\) equal to 47.0% of Net Income B\) increased by 47.0% over the previous year C\) 47.0% of Net Sales Revenue D\) 47.0% of Cost of Goods Sold Answer: C 18\) The financial statements of Trenton Office Supply include the following items: --------------------------- -------------------- -------------------- Cash \$42,500 \$43,000 Short-term Investments 31,000 19,000 Net Accounts Receivable 100,000 101,000 Merchandise Inventory 131,000 128,000 Total Assets 533,000 547,000 Total Current Liabilities 252,000 233,000 Long-term Note Payable 62,000 57,000 --------------------------- -------------------- -------------------- What is the 2026 current ratio (round final answer to two decimal places)? A\) 0.83 B\) 0.57 C\) 1.21 D\) 1.70 Answer: C Explanation: Current Ratio = Total current assets / Total current liabilities Current Ratio = (Cash \$42,500 + Short-term Investments \$31,000 + Net Accounts Receivable \$100,000 + Merchandise Inventory \$131,000) / \$252,000 Current Ratio = \$304,500 / \$252,000 Current Ratio = 1.21 19\) Candle Shop, Inc. has net sales on account of \$1,200,000. The average net accounts receivable is \$630,000. Calculate the days\' sales in receivables. (Use 365 days for any calculations, round any intermediate calculations, and final answer to two decimal places). A\) 231.17 days B\) 365.00 days C\) 192.11 days D\) 1.90 days Answer: C Explanation: Accounts receivable turnover ratio = Net credit sales / Average net accounts receivable = \$1,200,000 / \$630,000 = 1.90 Days\' sales in receivables = 365 / Accounts receivable turnover ratio = 365 / 1.90 = 192.11 20\) Howard Shop, Inc. has net sales on account of \$1,890,000. The Cost of Goods Sold for the current year is \$410,000. The average merchandise inventory is \$56,000. Calculate the inventory turnover. A\) 4.06 times B\) 4.61 times C\) 7.32 times D\) 0.14 times Answer: C Inv. Turonver= COGS/average inventory = 410,000/ 56,000=7.32 times 21\) Johnson Company reports net income of \$59,000, income tax expense of \$11,000, and interest expense of \$5,000. How does Johnson Company compare to an industry average of 19 times for the times-interest- earned ratio? A\) Johnson Company\'s times-interest-earned is 15, and Johnson can pay its interest expense easier than most companies in the industry. B\) Johnson Company\'s times-interest-earned is 15, and Johnson is not in a position to pay its interest expense as easily as most companies in the industry. C\) Johnson Company\'s times-interest-earned is 21, and Johnson can pay its interest expense easier than most companies in the industry. D\) Johnson Company\'s times-interest-earned is 21, and Johnson is not in a position to pay its interest expense as easily as most companies in the industry. Answer: B Explanation: (\$59,000 + \$11,000 + \$5,000) / \$5,000 = 15 times is the times-interest-earned ratio for Johnson. 22\) A company reports total assets of \$930,000 and total stockholders\' equity of \$630,000. How does this company compare to the industry average of 39% for the debt ratio (round final answer to two decimal places)? A\) The company\'s debt ratio is 67.74%, and the financial risk for this company is greater than the industry average. B\) The company\'s debt ratio is 67.74%, and the financial risk for this company is less than the industry average. C\) The company\'s debt ratio is 32.26%, and the financial risk for this company is greater than the industry average. D\) The company\'s debt ratio is 32.26%, and the financial risk for this company is less than the industry average. Answer: D Explanation: (\$930,000 - \$630,000) / \$930,000 = 32.26% 23\) The \_\_\_\_\_\_\_\_ measures the value that the stock market places on \$1 of a company\'s earnings. A\) dividend yield B\) price/earnings ratio C\) dividend payout D\) earnings per share Answer: B 24\) Analysts look for red flags in financial statements that may signal financial trouble. Which of the following is a red flag that suggests that a company may be in trouble? A\) a significant decrease in net income for several years in a row B\) a consistent movement in sales, merchandise inventory, and accounts receivable C\) a reduction in the debt ratio D\) operating activities are a major source of cash flows Answer: A 25\) Analysts look for red flags in financial statements that may signal financial trouble. Which of the following is a red flag that suggests that a company may be in trouble? A\) an increase in cash flows B\) a decrease in days\' sales in receivables from year to year C\) a high inventory turnover D\) days\' sales in receivables grow faster than for competitors Answer: D

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